Question

The table below shows the expected rates of return for three stocks and their weights in some portfolio:

Stock A | Stock B | Stock C | ||

Portfolio weights | 0.3 | 0.2 | 0.5 | |

State | Probability | Expected returns | ||

Recession | 0.2 | 0.08 | 0.03 | 0.14 |

Boom | 0.8 | 0.13 | 0.05 | 0.15 |

1. What is the portfolio return during a recession?

2. What is the expected portfolio return?

3. What is the standard deviation of the portfolio returns?

Answer #1

We know the following expected returns for stocks A and B, given
different states of the economy:
State (s)
Probability
E(rA,s)
E(rB,s)
Recession
0.2
-0.05
0.05
Normal
0.5
0.1
0.08
Expansion
0.3
0.18
0.12
1. What is the expected return for stock A?
2. What is the expected return for stock B?
3. What is the standard deviation of returns for stock A?
4. What is the standard deviation of returns for stock B?

Expected return and standard deviation for stocks A and B are
shown in the table below.
State of
Economy
Probability
of state of
the economy
Rate of return if state occurs
Stock
A
Stock
B
Recession
.2
-.10
.15
Normal
.5
.20
.22
Boom
.3
.60
.29
Expected return
.26
.227
Standard Deviation
.25
.05
1. Refer to the information in the table above. Suppose you have
$50,000 total. If you put $30,000 in Stock A and $20,000 in Stock...

Based on your research, the following states of economy,
probabilities of states, and returns are forecasted for Stock A and
Stock B:
Return if State Occurs
State of Economy
Probability of state
Stock A
Stock B
Recession
0.65
-0.15
-0.2
Normal
0.3
0.13
0.14
Irrational exuberance
0.05
0.2
0.29
a. What is the expected return on Stock A?
b. What is the expected return on Stock B?
c. Your research also indicates that stock A’s beta is greater
than stock...

Suppose an economy has three states: boom, normal, and
recession. Assume that the probability of a boom state is 0.2, a
normal state is 0.5, and a recession state is 0.3. And there are
three stocks in this economy, called Alpha, Beta, and Gamma
respectively. The return performance of these stocks has been
summarized by the following table:
Alpha
Beta
Gamma
boom
15%
28%
1%
normal
6%
12%
3%
recession
-12%
-30%
20%
(Please show your intermediate processes, instead of...

Based on your research, the following states of economy,
probabilities of states, and returns are forecasted for Stock A and
Stock B:
Return if State Occurs
State of Economy
Probability of state
Stock A
Stock B
Recession
0.65
-0.15
-0.2
Normal
0.3
0.13
0.14
Irrational exuberance
0.05
0.2
0.29
a. What is the expected return on Stock A?
b. What is the expected return on Stock B?
c. Your research also indicates that stock A’s beta is greater than
stock...

Given the following information, what is the expected rate of
return and the standard deviation for this stock?
State of Economy
Probability of State of Economy
Rate of Return
Boom
0.3
0.23
Normal
0.65
0.14
Recession
0.05
-0.36

You've estimated the following expected returns for a stock,
depending on the strength of the economy:
State (s)
Probability
Expected return
Recession
0.3
-0.02
Normal
0.5
0.09
Expansion
0.2
0.14
1. What is the expected return for the stock?
2. What is the standard deviation of returns for the stock?

2. The table below shows a portfolio
of stocks. Using the information on the table, perform the
following tasks. (30 points)
1. Stock
2.
Total Value
3.
Weight
Stock Return
Recession
(60%)
Normal
(40%)
MRK
$ 4,600
15%
10%
VZ
$ 4,400
1%
15%
AAPL
$ 7,500
8%
18%
CAT
$ 2,500
-2%
5%
FDX
$ 1,000
3%
12%
Complete column 3 using the total value to compute the
weights.
Calculate the overall expected return of the portfolio assuming
that...

Consider the following information on portfolio weights,
predicted returns and standard deviation of returns for two
restaurant stocks, Super Foods Inc., and Henry's Dining Corp.
Assume the correlation between two stocks is 0.4. Given the
information, what is the portfolio's expected return? Provide your
finals answer in decimal points (e.g. 0.13) and not in percent
terms (e.g. 13%).
Stock
Weights
Return
Standard Deviation
Super Foods Inc.
0.63
0.14
0.03
Henry's Dining Corp.
(1-0.63)
0.10
0.03

We know the following expected returns for stock A and the
market portfolio, given different states of the economy:
State (s)
Probability
E(rA,s)
E(rM,s)
Recession
0.2
-0.02
0.02
Normal
0.5
0.13
0.05
Expansion
0.3
0.21
0.09
The risk-free rate is 0.02.
Assuming the CAPM holds, what is the beta for stock A?

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